2018 January and April renewals disappointing: A.M. Best annual commentary on the global reinsurance sector

Thursday, 06 September 2018

Optimism over a turn in the global reinsurance market after the catastrophes seen in 2017 quickly diminished after disappointing renewals for 1 January and midyear 2018, providing minimal pricing increases to reinsurers and leaving market dynamics relatively unchanged, according to a new report from ICMIF Supporting Member A.M. Best.

The new Best’s Market Segment Report, “Global Reinsurance: Optimism Fizzles, It’s Back to the ‘New Normal,” states that the reinsurance sector continues to skip along the bottom of the market with no clear trigger for a meaningful and widespread rate hardening. At the same time, the capital markets’ influence on the reinsurance sector continues to expand, replacing capacity lost in 2017 and then some, with an estimated USD 96 billion in convergence capital in 2018, compared with USD 87 billion in 2017.

The reinsurance sector remains attractive to investors; however, returns for traditional reinsurers have been dismal, says the report. After normalizing for favourable reserve development, the global reinsurance composite posted a five-year average return on equity of 4.5% at year-end 2017, compared with a five-year average ROE of 6.8% at year-end 2016. A.M. Best says it is estimating a combined ratio of 94.8% and a return on equity of approximately 8% for full-year 2018, assuming a normal level of catastrophes. A.M. Best is also maintaining its negative outlook on the reinsurance market segment.

“Property catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as historically has been the case,” said Robert DeRose, Senior Director, A.M. Best. “This is an important distinction with respect to current market dynamics. Any hope for near-term improvement in the market is directly correlated to the current level of excess capacity in the overall market today, which is being compounded by the continued inflow of alternative capacity.”

According to the report, terms and conditions did stabilize, even though reinsurance pricing has not developed as anticipated, however, terms and conditions remain below expectations for producing a reasonable risk-adjusted return relative to the average cost of capital for most reinsurers. Improvement in interest rates should have a positive impact on the bottom line, but the momentum will emerge gradually as a flattening yield curve is deflating the effects of a rising federal funds rate in the United States.

“Much uncertainty remains at this point and the existing risks to the market remain in play—as do one-off risks such as the potential fallout from Brexit and a global trade war and what these may mean to the global economy,” said Scott Mangan, Associate Director at A.M. Best.

In 2014, A.M. Best and other market observers began to question the relevance of the underwriting cycle in a market environment coined as the new normal. Today, the new normal for reinsurers appears to be one with returns that are less impressive and underwriting and fee income becoming a larger contributor to profits. A.M. Best believes the solid market players will be ones that have been conservative in underwriting and in reserving; have been able to develop a book of business that remains relevant and allows for quick shifts in and out of lines of business depending on market conditions; and have created expertise in managing third-party capital to their own advantage.

The report contains A.M. Best’s highly regarded annual ranking of the Top 50 Global Reinsurance Groups which features ICMIF members R+V Versicherung AG (Germany) at ranking number 17 and at number 37 is American Agricultural Insurance Company (USA).

Other highlights from this year’s report include:

The most notable movement in the ranking of the Top 50 Global Reinsurance Groups was Munich Reinsurance Company reclaiming the top spot as world’s largest reinsurer, as measured by reinsurance gross premium written. Munich Re has claimed the top spot every year since 2010, with the exception of 2017, when Swiss Re topped the list. Most other movements in the rankings were due to ongoing mergers and acquisitions, most notably Sompo Holdings, Inc., which jumped to No. 22 from No. 46 after having consolidated Endurance Specialty Holdings Ltd. into its financial reporting. This report also breaks out two sub-rankings of top non-life and life global reinsurers.

In the wake of U.S. tax reform, many Bermuda-domiciled reinsurers have decreased the size of the inter-company reinsurance arrangements, or eliminated them altogether; moved capital to on-shore balance sheets; formed new Bermuda entities that elect to be a U.S. taxpayer; and restructured their treaties from a quota share to excess of loss or stop-loss policies.

The global reinsurance report also explores the state of the insurance-linked securities market following the 2017 catastrophes, along with in-depth reviews of the Lloyd’s and life reinsurance markets, as well as geographic regions such as Asia/Pacific and Africa.

A.M. Best also will host its annual Reinsurance Market Briefing at the 2018 Rendez-Vous de Septembre (Rendez-Vous) on Sunday 9 September 2018, at the Hermitage Hotel in Monte Carlo, Monaco. The briefing will start at 10:15 a.m. and conclude at 11:45 a.m. (CEST). To register online, please click the following link: www.ambest.com/conferences/rmbseptembre2018.